What is an employer payment plan (EPP)?

Health insurance remains a popular employee benefit for U.S. workers. But, traditional group health plans have costly annual rate hikes and strict participation requirements that leave many business owners looking for other ways to pay for their employees’ healthcare.

Under the Affordable Care Act (ACA), applicable large employers (ALEs) with 50 or more full-time equivalent employees (FTEs) must provide affordable health insurance that meets minimum value to at least 95% of their full-time employees and their dependents. Small employers aren’t subject to ACA requirements but often offer a health benefit to attract and retain top talent.

Some employers may want to reimburse or directly pay for their employees’ health insurance policies instead of providing a group health plan. This arrangement, known as an employer payment plan (EPP), may initially sound ideal. But offering one at your organization can subject you to costly ACA penalties. So, what other options are there?

In this article, we’ll go over everything you need to know about EPPs and explain how you can compliantly reimburse your employees for their medical care expenses with a health reimbursement arrangement (HRA) or taxable stipend.

What is an employer payment plan?

According to IRS Notice 2013-54¹, employer payment plans are arrangements where an employer reimburses an employee for all or a portion of their individual health insurance premium expenses. Another type of EPP involves an employer paying for an employee’s health insurance premiums directly on behalf of the employee.

In each situation, the employer pays toward each employee’s individual coverage, not employer-sponsored coverage, like in a traditional group plan program.

The IRS doesn’t consider the following three arrangements EPPs:

1. An employer can give their employees additional compensation (i.e., a taxable stipend, raise, bonus, etc.) to pay for medical insurance.
   1. As outlined in IRS Notice 2015-17², this arrangement must come with no expectation that the employee must use the money to buy health insurance. An employer also can’t ask for proof of insurance.
2. An employer can send a portion of an employee’s post-tax wages directly to the issuer of their individual health insurance coverage for premium payments as part of the employer’s payroll process.
   1. This arrangement is only allowed at the employee’s request. It must meet the regulations outlined by the Department of Labor in 29 C.F.R. §2510.3-1³.
3. An employer can offer an employee the choice of cash or a post-tax amount of money to go toward a health insurance policy.
4. The federal government allows certain HRAs to integrate with individual insurance policies.

Do employer payment plans comply with the Affordable Care Act?

After the federal government implemented the ACA, IRS Notice 2015-17 clarified information about EPPs and compliance. According to the Notice, EPPs or any other arrangement where employers reimburse or pay employees for their medical care (including purchasing an individual health plan) were considered group health plans.

All group health plans are subject to the ACA market reforms⁴, specifically the provisions prohibiting annual dollar limits on essential health benefits and requiring preventive services without cost-sharing. While health plans on the individual market follow the ACA market reforms, the IRS says EPPs can’t integrate with individual market policies to satisfy the ACA.

Because they don’t meet the market reform requirements and can’t use their integration with ACA-compliant individual plans to meet the necessary provisions, EPPs don’t comply with the ACA. This is the case regardless of whether the employer makes payments or reimbursements to the employee on a pre- or post-tax basis.

What’s the penalty for offering an employer payment plan?

If you’re an employer offering an EPP or other group health plan that doesn’t comply with the ACA, you could face a penalty of $100 per day per affected employee (or $36,500 per year per employee)⁵.

This penalty also applies to all employers—including non-ALEs (those with fewer than 50 FTEs)—because the ACA considers an employer payment plan a group health plan subject to the ACA.

Until December 31, 2015, the IRS provided small employers (non-ALEs) offering EPPs, S-Corporation healthcare arrangements for 2% shareholders, and Medicare and TRICARE reimbursement arrangements with temporary relief from the excise tax penalty to transition to an ACA-compliant health policy².

However, business owners currently offering EPPs are subject to the penalty with no option for transition relief.

What are ACA-compliant alternatives to employer payment plans?

If you have an EPP and don’t think traditional group coverage is right for your organization, a few ACA-compliant alternative coverage options are available.

One of these options is an HRA. An HRA is an IRS-approved, employer-funded health benefit that allows employers to reimburse employees tax-free for health insurance premiums and other qualified medical expenses.

With an HRA, you choose a monthly allowance that works for your organization’s budget, and your eligible employees use that allowance to pay for the healthcare services and items they need. Once an employee incurs an eligible expense and you verify and approve the cost, you reimburse them up to their allowance amount.

Similarly, health stipends are a flexible way to supplement your employees’ income with taxable allowances to pay for their monthly premiums and other medical care. While they’re not ACA-compliant on their own, health stipends are a great way to boost other health benefits and offer your employees even greater coverage.

Generally, the IRS considers HRAs group health plans under the ACA. Some HRAs—like the group coverage HRA (GCHRA)—specifically integrate with group health plan coverage, while others integrate with individual health coverage.

Let’s dive deeper into HRAs and stipends below to learn more about how they can work for your organization, your employees, and the ACA.

Qualified small employer HRA (QSEHRA)

When Congress passed the 21st Century Cures Act in 2016, small employers could offer their employees a qualified small employer HRA (QSEHRA). QSEHRAs aren’t group health plans and don’t need to adhere to the ACA market reforms. They’re also only for employers with fewer than 50 FTEs—ALEs that must comply with the employer mandate cannot offer a QSEHRA.

With a QSEHRA, small employers can reimburse their employees for healthcare expenses outlined in IRS Publication 502, including individual health insurance premiums, on a tax-free basis. Like all HRAs, only employers can contribute funds and set the monthly allowance. However, the IRS sets annual maximum contribution limits for QSEHRAs.

Employers offering a QSEHRA must offer it on the same terms to each of their full-time W-2 employees. Seasonal or part-time employees are also eligible if the employer chooses. They must receive the same allowance amount as full-time employees.

Lastly, QSEHRA reimbursements are payroll tax-free for employers and employees. Employees don’t have to pay income taxes on employer reimbursements as long as their health insurance policy meets minimum essential coverage (MEC).

Individual coverage HRA (ICHRA)

In 2019, following an executive order, the Department of the Treasury, Department of Labor, and Department of Health and Human Services created regulations⁶ allowing a new type of health benefit to integrate with individual health insurance coverage under certain conditions, like meeting specific affordability requirements. This benefit is called an individual coverage HRA (ICHRA).

The ICHRA works much like the QSEHRA but is available to organizations of any size. It has no minimum or maximum employer contribution limits, and employers can offer different allowance amounts based on 11 employee classes for greater customization.

Instead of meeting ACA group market reforms, the ICHRA meets ACA requirements by requiring employees and their dependents to enroll in a qualified individual health plan to receive tax-free reimbursements. Additionally, employees must regularly attest to having individual coverage to continue receiving ICHRA benefits.

If you want to offer an ICHRA and a traditional group plan, you can do so. However, you can't give the same employee class a choice between participating in the ICHRA or the group plan. Instead, you must offer one class an ICHRA and another a group plan.

Lastly, ICHRAs are an excellent solution for ALEs wanting an affordable and flexible alternative to traditional group health insurance. An ICHRA can satisfy the employer mandate as long as the ICHRA allowance is affordable. Based on affordability calculations, employees can opt in or out of the benefit.

With HRA administration software like PeopleKeep, you can easily design your ICHRA benefit to ensure it complies with the employer mandate.

Taxable health stipends

The last way you can support your employees' healthcare needs is with a taxable health stipend. A health stipend isn’t a formal health benefit, so it doesn’t satisfy the employer mandate for ALEs. But you can compliantly offer them alongside a group health plan or an HRA to give your employees more comprehensive medical coverage.

With a health stipend, employers offer their employees a fixed amount of money that they can use to pay for individual policies and other medical expenses. Unlike EPPs, employers usually add stipend money to their employees' paychecks as extra wages. There’s no limit to how much money you can offer with a stipend.

The IRS considers stipend money taxable income for the employee, and employers are subject to payroll taxes. But even so, stipends have many benefits. They’re customizable, can cover a wide range of expenses, work for all employee types, and are easier to administer because they have fewer compliance regulations than other health benefits.

You can also choose how you want to offer your stipend—whether on a one-time basis, regularly, or with the reimbursement method. However, you can’t legally require your employees to purchase a health policy with their stipend or ask for proof that they did. So, your employees can use their stipend on whatever they want—even if it’s not healthcare-related.

Conclusion

Before the ACA, EPPs were a popular way for employers to pay for their employees’ healthcare. While you can’t pay for your staff’s personal health insurance and medical costs directly anymore, offering an HRA is an excellent way to compliantly reimburse your employees for their health insurance plans and other out-of-pocket medical expenses.

ACA regulations may seem overwhelming at first. But if you’re an ALE, it’s crucial you follow all necessary healthcare regulations to remain compliant so you don’t face costly tax penalties.

If you think an HRA is the right choice for your company, PeopleKeep can help! Contact our personalized benefits advisors, and we’ll get you on your way.

1. https://www.irs.gov/pub/irs-drop/n-13-54.pdf
2. https://www.irs.gov/pub/irs-drop/n-15-17.pdf
3. https://www.law.cornell.edu/cfr/text/29/2510.3-1
4. https://www.cms.gov/marketplace/health-plans-issuers/insurance-market-reforms
5. https://www.law.cornell.edu/uscode/text/26/4980D
6. https://www.govinfo.gov/content/pkg/FR-2019-06-20/pdf/2019-12571.pdf